The Coca-Cola Company — Form 10-Q Summary
Reporting period: Quarter ended September 26, 2014; comparisons are with the quarter ended September 27, 2013. Year-to-date figures cover the nine months ended on those dates. Figures are in U.S. dollars unless noted. The filing is unaudited. Beverage sales are seasonal, with the second and third quarters typically strongest.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net operating revenues | $11.976B | $12.030B | $35.126B | $35.814B |
| Gross profit | $7.346B | $7.237B | $21.594B | $21.708B |
| Operating income | $2.711B | $2.472B | $8.257B | $8.123B |
| Net income attributable to Coca-Cola shareowners | $2.114B | $2.447B | $6.328B | $6.874B |
| Diluted earnings per share | $0.48 | $0.54 | $1.42 | $1.52 |
| Gross margin | 61.3% | 60.2% | 61.5% | 60.6% |
| Consolidated operating margin | 22.6% | 20.5% | 23.5% | 22.7% |
| Operating cash flow | — | $7.979B | $7.712B |
Quarterly revenue was nearly flat year over year, while shareowner net income and diluted EPS fell. Operating income increased, helped by lower other operating charges; the prior-year quarter included $190 million of intangible-asset impairment charges. In contrast, the 2014 quarter’s other income (loss) was a $312 million loss, versus $658 million of income in 2013, largely reflecting the prior-year $615 million gain on deconsolidating Brazilian bottling operations and 2014 North American refranchising charges.
For the first nine months, revenue decreased about 2%, operating income increased about 2%, and shareowner net income decreased about 8%. Prior-year results included significant bottling transaction gains, while 2014 results included refranchising and Venezuela-related losses. Gross margins improved, partly reflecting lower commodity costs, favorable geographic mix, and the prior-year deconsolidation of Philippine and Brazilian bottling operations.
Liquidity, debt and capital allocation
- At September 26, cash and cash equivalents were $11.084B and short-term investments were $9.185B, totaling $20.269B. Current assets were $35.452B and current liabilities were $32.760B.
- Total borrowings shown on the balance sheet—loans and notes payable, current maturities of long-term debt and long-term debt—were approximately $41.8B, up from approximately $37.1B at year-end 2013. The filing cites commercial paper issuance and debt reclassification among the drivers. Long-term debt, including current maturities, had a carrying value of $22.635B.
- Operating cash flow was $7.979B; purchases of property, plant and equipment were $1.618B. Investing activities used $6.558B, including substantial purchases of investments. Financing activities used $196M.
- The company paid $2.680B in dividends during the nine-month period and reported dividends of $0.305 per share for Q3. It repurchased 71.4 million shares year to date for $2.887B in recorded cost. Management expected approximately $2.5B of 2014 treasury-share purchases, net of employee stock-option proceeds.
- Available lines of credit for general corporate purposes totaled $6.321B. Management characterized liquidity as strong and said it expected operating cash flows and available funding sources to support financial commitments.
Operating trends and material changes
- Worldwide unit-case volume rose 1% in Q3 and 2% year to date; concentrate sales volume rose 1% in both periods. Q3 regional unit-case volume: Eurasia & Africa +5%, Europe −5%, Latin America +2%, North America −1%, Asia Pacific +2%.
- Europe’s volume weakness reflected subdued consumer confidence and spending, poor weather and competitive pressure. North America faced declines in Diet Coke, sports drinks, juices and juice drinks. Growth in emerging markets and still beverages supported results in several regions.
- For the nine-month period, foreign-exchange movements reduced revenue by an estimated 2% and unfavorably affected operating income by 6%. A stronger U.S. dollar was a key factor.
- Other operating charges were $128M in Q3 and $457M year to date, including productivity-program costs, German bottling integration costs, Russian juice restructuring, and a Venezuela receivable write-down. North American refranchising generated $270M of Q3 and $410M of year-to-date charges in other income (loss), including noncash losses related to transferred or held-for-sale intangible assets.
Outlook, transactions and risks
- Management said the near-term business outlook remained strong. Based on early-October exchange rates and hedging, it expected currencies, including the Venezuelan bolivar, to reduce consolidated operating income by 7% in Q4 and 6% for full-year 2014. Management estimated the Venezuelan Fair Price Law would reduce full-year Latin America segment revenue by about 5% and consolidated operating income by about 2%.
- Management expected 2014 capital expenditures of approximately $2.5B. On October 21, 2014, the company announced expanded productivity initiatives, targeting an incremental $2B in annualized savings and total annualized savings of $3B by 2019, to support marketing, innovation and margin improvement.
- The announced Monster Beverage transaction contemplated a 16.7% equity stake, an exchange of energy and non-energy beverage businesses, expanded distribution arrangements and a net cash payment of $2.15B. Closing was subject to customary conditions and regulatory approvals and was expected in late 2014 or early 2015.
- The company had invested in Keurig Green Mountain and held an agreement to acquire additional shares that could raise its interest to 16%. Its investment and related share-purchase derivative expose results to valuation changes.
- Venezuela remained a significant risk: the company recorded a $226M charge after changing its remeasurement rate to SICAD 1, and reported $275M of U.S.-dollar receivables from its bottling partner, $175M of cash and investments in its subsidiary, and restrictions on converting local currency and paying dividends. Further devaluation, limited convertibility or collection difficulties could cause additional losses.
- The company reported $527M of maximum potential payments under third-party guarantees, which it did not consider probable to be called. Management said pending legal matters were not expected to have a material adverse effect overall; it could not estimate a possible loss related to the Aqua-Chem asbestos litigation. The company noted that risks described in its 2013 Form 10-K also remain relevant.
Important facts for investors to verify
- Whether underlying volume, pricing and product mix can offset weak markets, currency pressure and the Venezuelan Fair Price Law.
- How much of the reported earnings change reflects recurring operations versus bottling transactions, refranchising, restructuring and currency-related items.
- Progress, costs and execution risks of the expanded savings program, including whether savings are reinvested as planned and translate into durable growth and margin gains.
- Venezuela’s currency-conversion access, receivable collectability, cash restrictions and potential for further remeasurement or impairment charges.
- The final terms, timing, regulatory approvals and cash impact of the Monster transaction, and the valuation and exposure associated with Keurig Green Mountain investments.
- Debt maturities and refinancing needs, given the increase in short-term borrowings and current maturities; also assess cash accessibility, since much of the company’s foreign cash was considered indefinitely reinvested.